Escrowing for flood insurance post-merger

Happy Monday, compliance friends! We’re only 10 days out from turkey day, so start stocking up on gravy and dinner rolls!

In the meantime, let’s talk about flood insurance and mergers. We have received a few calls from credit unions shortly after a merger. Imagine a scenario where one credit union met the small lender exception and therefore did not escrow for flood insurance, but was then acquired by a larger credit union that never qualified for the small lender exception. The newly merged credit unions have asked if they are required to begin escrowing flood insurance premiums for the loans that were made while the small lender exception applied. The answer to this question is a bit unclear, but this blog will try to gleam some guidance from NCUA’s flood insurance rules.

NCUA’s flood insurance rule requires credit unions, and their servicers, to escrow premiums and fees for flood insurance when making, increasing, extending, or renewing a designated loan unless the credit union or a loan meets one of the exceptions in the rule. See, 12 CFR § 760.5(a)(1). Although there are multiple exceptions to the rule, we’ll focus on the small lender exception. Section 760.5(c)(1) of NCUA’s rules creates the small lender exception to the escrow requirements and section 760.5(c)(2) creates the “change in status” rule that applies after a credit union is no longer considered a small lender.

As with plenty of rules, there is not much guidance on how a merger affects the requirements for loans made under the small lender exception as outlined in section 760.5(c)(1). This is probably because not many credit unions met the small lender exception, and therefore this has not been a common question.


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